I'm the publisher of Forbes magazine, where I write a biweekly column called Innovation Rules. I'm also a regular panelist on cable news' popular business show, Forbes on FOX (with an average viewership of 1.2 million households per show in 2012), and frequent guest analyst on CNBC's The Kudlow Report. My 2004 book, Life 2.0, was a Wall Street Journal business bestseller. I'm also an entrepreneur, an active angel investor, and sit on three outside boards. For co-founding Silicon Valley's largest public affairs organization, the 6,500-member Churchill Club, I'm a past Northern California winner of Ernst & Young's prestigious "Entrepreneur of the Year Award." I earned a B.A. from Stanford University. I lecture up to 50 to 60 times a year on the innovation economy.

Slow Growth Will Destroy America

From 1946 to 2000, America’s GDP annual growth rate averaged 3.5% and the country prospered. This growth occurred despite nine recessions – yes, nine – over the period. Since a recession is a pause or contraction in growth, the American economy actually grew by 4% or more in non-recessionary years.

It is tempting to look at the 1946 to 2000 period and analyze it as an anomalous break in history during which America essentially had no big problems and no serious global competition – hence the robust growth and happy memories. But that isn’t true. The immediate post-war years were burdened by a federal debt load that had peaked at 120% of GDP during the war. The economy also had to absorb millions of men back from the armed forces.

The 1960s economy faced a near nuclear war in 1962, JFK’s assassination in 1963, race riots, political riots and more assassinations in 1968.

The 1970s economy began with a mild recession and then suffered a huge one in 1973 and 1974, when stocks fell 48% and unemployment hit 11% amidst OPEC oil embargoes and scandal driven resignations of the American vice president and president. In 1979 President Jimmy Carter gave a speech – the infamous malaise speech – that blamed his fellow Americans for the poor economy. The decade ended with long gas lines yet again and interest rates headed to 20%.

If you have fond memories of the 1980s economy, perhaps you weren’t really there. The decade began with the recession of 1980. Then Paul Volcker got serious and lanced the inflation boil once and for all. This led directly to a short but very nasty recession in 1982, when unemployment soared over 10%. In 1987 came a one-day stock panic that saw the Dow drop 22.6%. The go-go 1980s came to a close with yet another recession looming.

The 1990s began with a recession that saw an American icon, IBM, nearly go bankrupt. Bill Clinton beat George H. W. Bush on a slogan, “it’s the economy, stupid.” Clinton was helped by the third-party candidacy of H. Ross Perot, who claimed that Japan and Mexico were destroying the American economy.

Yet during all this time, from 1946 to 2000, America prospered and grew rich.

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Rich, a big A-MEN to you!!! I couldn’t have said it better. If we don’t start to see decent growth soon, the next recession (and it’s coming!) will hurt us more because our economic base will be lower.

Republican candidates will never put growth front and center. This is because the Republican electorate is not interested in growth. They are more interested in bashing down the potential competition from immigrants, blacks and poor people than doing better themselves.

Look at the issues that get Republicans all lathered up. They don’t get going about growth because they don’t want to work, they just want to feel better about themselves and the easiest way to do that is to find somebody lower down the ladder to beat on.

Two weeks ago (Apr 29th) The Wall Street Journal published an editorial entitled “The Keynesian Growth Discount.” It’s obvious that the Keyesian model, firmly in place for the previous 3 years, has failed. If this doesn’t change soon, we’re in for a healthy bout of STAGFLATION.

It’s hard, if not simply impossible to argue that we need to get back to growth. Conterintuitive to think that we can continue to go on this way without it costing us a lost decade-or worse.

All that said, some of us believe the political warfare is more about how we get there–not that we need to get there. The end game is at stake, what kind of nation are we becoming?

We need to stop throwing the baby out with the bathwater by thinking the solutions to our problems are free rides for corporations, trickle-less tax breaks for rich people (sorry) and moving anything and everything possible offshore to side-step a moral imperative to help make us strong from the inside out.

We’re in a global world now and the issues are more complex. With this in mind, my response to selected points of yours are:

1. Fix China’s currency war against the US. Our dollar and it’s value is lying flat under the belly of the tiger. Without this fix, we stand to loose more than we could gain by value enhancement, etc.

2. Get federal share of GDP back under 20% (from 25% today) by increasing private investment in the United States, getting people back to work and seeding innovation. Fed share and GDP are variables that interact with eachother. The war on social programs is a non-starter. Hate to say it but our capitalist system likes it’s bits and isn’t going to cave on this. There is a role for government–the polls say so.

3. Simpler, flatter tax rates for personal income tax for ALL but the big boys and girls need to pay up. They, of course, are benefiting from the system. My father believed that paying more taxes was an honor. What ever happened to civic responsibility—for everybody.

4. Lower corporate tax rates, in line with global competition, is great as long as you remove the loop holes, corporate welfare and obstacles to collecting taxes on cross-border funds exchanges (corporate assets coming back in from outside).

5. Simpler, transparent regulation with teeth that in fact materially penalizes corporations for bad behavior. Save a fortune on legal theatre. Most Americans are furious with the lack of transperancy and accountability. Dodd-Frank falls woefully short of this objective. Not the opposite.

6. Pro-energy policy or pro oil company benefits? Yeah, if you mean energy policy that focuses on something other than present practice. And if it involves energy from something other than oil. It’s a difficult addiction but the dealers certainly have a lock on the market.

7. Immigration policy favoring skilled immigrants so that the education we provided them is to our benefit or so that we can attract the smart stuff. Ok to that. HOwever, a recent article in Bloomberg recently shared that North Carolina’s doubling of it’s latino population has had a palpable positive economic benefit on the states agri-biz through providing a loyal,hardworking and peaceful workforce. Until they were there the sector was moving sideways because other families are sending their kids to college. Isn’t this how past generations of immigrants contributed nation? If I recall they helped build this nation e.g Chinese immigrants who came to Southern California to work on the railroad.

8. Stop war against business (e.g., Obama’s war on Boeing) by helping business become better corporate citizens.

9. Reform all unions and create an incentive based labor force through estabilishing rules of the road. There is no need for the US to look like a devloping country because we want to compete with China. China envy is not hot.

10. Education reform that includes salaries for work well done, places resources into the classrooms, applies learning technologies and cultural inter-changes. Our schools are an environmental swamp lacking a sense of purpose and priority.

11. Patent reform (which currently favors large companies over entrepreneurs)but doesn’t protect us from international conversion and swiping of our brain trust.

Big business has everything to gain from the present situation and seems to be doing so just fine. I think it’s great. However, I think they could do better. And part of this “better” is fostering innoviative solutions and win-win situations.

We don’t have to become an emerging market nation to compete with an emerging market nation. But the stats all say we’re moving that way. Your solutions guarantee our arrival there. Some of us disagree and don’t want to go there, no matter how evangelical the belief system.

You are absolutely correct that growth is the “the whole ballgame”. The question is why has there been so little growth. The reason is that growth in the United States is not as profitable as growth overseas.

The reason for this is low wages and low shipping costs. Manufacturers can make much higher profits where labor costs are low, China for example. Further, since it is so inexpensive to ship products overseas through large containerized vessels, the profit margins are considerably larger.

Forbes.com had a very good demonstration of this principle when it ran a story about a company in Ohio called SmithCNC-USA. This firm “…helps midwestern manufacturers get components and raw materials abroad..”. According to the story…”Smith’s customers are U.S. manufacturers doing small and medium-size production runs, either for their own end products or as contract suppliers to other U.S. manufacturing firms. If they are lucky, they eke out gross profit margins between 20% and 30%. That is, after paying for labor and raw materials, they have at best 30 cents of the revenue dollar remaining to cover overhead and depreciation on their machinery. Smith says that by subcontracting some of the work abroad–for example, the intake manifold in a car’s air system–these contractors can add 20 points to that gross margin, and that’s after paying Smith his fee of 5% to 7% of the foreign invoices. In seven years Smith has amassed 225 vendors in Mexico and China that do the subcontract work.” Raw materials cost almost the same in Mexico and China as they do in the US. The same is true for machinery, electricity, water. It is all about the labor costs.(1)

None of the proposals that you suggest address this fundamental truth. Taxes are a trivially small component of the equation. Further, I would point out that the tax rate for the top brackets in the 1950’s was over 90%, almost three times higher than today. Corporate tax rates were about 60%, almost twice what they are today.(2)

Tax rates have been going down since their height in 1953 on 92%. When President Carter left office the highest tax bracket was only 70%. Two years later under Mr. Reagan it was 50%. Today it is 35%. The tax rates have been going down for decades. Despite this, there is less and less investment in the United States, less and less manufacturing, lower and lower rates of Return on Investment and Return on Equity.

If lowering tax rates would help improve our economy, it should have happened yet the exact opposite is easily observable.

You asked “The mystery is why Republicans are not hammering away at growth. Mitch, Mitt, Newt, Huck – are you listening?” The answer is that there is nothing that they can do. They are as aware as I am that manufacturing is fleeing the United States not because of high taxes but in spite of low taxes, it is fleeing to low labor costs. They cannot change that equation and they know it.

Growth comes from innovation which will never happen in an economy that abuses its workers. These countries which seek to bankrupt their workers, use devalued currencies to slash their wages and savings, these countries will always lose, because they have destroyed the capital of their future innovators.

Rich, Both Growth AND Government Spending Controls are needed to save the country.

Government Spending solutions are obvious -even within the understanding of politicians.

Growth requires more creative solutions – beyond what you and the politicians have suggested. There are huge problems with our capitalist system. These can, and must, be fixed before we can bring jobs back to the US. We can compete with the world, including the Chinese. We have the talents and creativity required to vastly improve productivity and reduce costs in the US. But the current system provides reward potential only to the view, mainly to those already at the top – the ones with the capital. The new system would open opportunities and rewards to those with ideas.

One simple new law could change the entire wealth creation equation and save the US from economic collapse.

Of course there is slow growth at the moment since each $ the government borrows is a $ someone didn’t loan to or invest in a private company. How many startups would the current national debt have funded?

There won’t be change until the public truly gets how bad things are. The public yawns when it hears the US is $trillions in debt thinking “big number, but its a big country”. since they have no perspective. We need to rephrase the issue:

The federal government will need >$1 million per household to pay its IOUs! > $116 trillion =”official” debt plus money short for future social security, medicare, etc Even its “official debt” of $14.2 trillion is $123,754 per household! Details at http://StopNationalDebt.com with links to contact congress & complain.

Unfortunately: “POLL REVEALS: Americans Are Still In Deep Denial About The Deficit” http://read.bi/h6QDGR If they realized how bad it is politicians would need to act.

So be among the first to join the new Facebook cause “Stop National Debt” : http://www.causes.com/causes/606425-stop-national-debt since if you don’t spread the word, who will? We need to spread the word virally to educate non news-junkies.

It’s amazing how history can be interpreted in completely different ways. The period of growth from 1947 to 1980 was one of extremely high marginal tax rates on the wealthy (try 90% as a top tax bracket) and one of regulation and human capital investment. And, not that anyone here may be concerned (but you should be), the period was also marked by equality growth along all income brackets. Then, starting in 1980, we cut taxes, deregulated banks, and shrank government investments in human capital. Not surprisingly, real income growth slowed for the lowest income brackets, becoming negative in real terms for the lowest 20% of incomes. After 20 years of this we’ve got 1.7% growth and the longest recession since the great depression, yet Rich wants more of this?! Listen, we all want to prosper here, but immediate gratification is tantamount to addiction. Are we addicted to immediate financial returns at the expense of long term growth? We all know how important human capital is, but Rich is calling for education “reform” and we know what that means. Dismantling of the unions would make such reform much easier. For instance, this “reform” in the last 3 months is reflected in job growth: we’ve created 738,000 jobs in the private sector yet laid off 25,600 local educators!!! (from BLS Monthly Emp. Sit.) How’s that for human capital investment and long term growth? It’s really time we get a clue and a little patience if we want real long term growth.

Where has all this shortsightedness come from? The amazing country is falling apart because it’s being eaten from the inside out by this selfishness/greed/studity. Since when can a civil society sustain itself on these economically unfeasable and socially destructive approaches to problems.

Why is it “un-American” for oil companies to be told that they don’t need corporate welfare? Why do the taxpayers have to financially support transporting oil to the US and oil company investment in oversees oil? Talk about socialism–the bad form not the good form–gone awry.

In addition, since when do those people who get the most from this county feel that don’t have a responsibilty to give back to the hand that feeds them? In my opinion, taxes are in issue in rhetoric only… the real issue is social and civil repsonsibility –where we work to create long term sustainable value.

Rich, I have followed you for years and every now and then laugh because your agenda always boils down to the same thing—to chant the party line even when your song is sung out.

And even when the ideas you propose are rung out.

Your way is to put this county back to the guilded age, one notch down.

We need immigration, we need great public schools, non-corporate controlled healthcare, business that pay their own freight, taxes for a civil society and the rest. I hate to tell you this, but pure capitalism in this fashion is nothing but dynasties competing against other dynasties–like Europe before WWI.

In support of the capitalist element of our republic, and our role on the global stage, perhaps an idea or two that is constructive?

Growth is the key, however you left off a key factor which is bankruptcy reform. Small businesses rely on personal credit and debt to cover start up costs, fund working capital, and build a market. Changing the bankruptcy laws to make them more punitive to credit card debtors combined with the collapse in real estate values has eliminated these avenues of funding and small business creation has basically ground to a halt. We need a new bankruptcy reform that will encourage risk taking by making mortgages, credit cards, and student loans all dischargable under a chapter 13 reorganization bankruptcy. Until we do this there will no net small business creation and anemic GDP growth.

Rich, Whatever else we can say about Mr. Obama, he was definitely forthcoming about his plans for the country. It didn’t help that there was no credible alternative either. In your words, Mr. McCain ran a “grouchy, incoherent campaign.” We definitely need some political leaders to champion free enterprise and individual responsibility but they are few and muted, even now.

Sometimes the folks I generally disagree with are 100% right, and this column is a case in point. I dearly wish my Democratic party would split in two, leaving our high earners and environmentalists in some new honestly scandalous party for those who have a lot and want to use government to grab more. Who knows maybe they’d end up Republicans. In any case Democrats would be well rid of the whole bunch of them. Those of us who believe that fairness is an important part of the American Dream could regain our Democratic Party. Perhaps we and the honestly rational Republicans, such as the column’s author, could find common cause in promoting growth. I never liked JFK as a President and like him less since so many have made him a cult figure so that they can cultivate their personal historical illusions. But he did say two intelligent things: (1) a rising tide DOES lift all boats – perhaps the most succinct pro-growth message ever; (2) “pay any price, bear any burden” – our country stands against tyranny anywhere, and for freedom everywhere. If the folks I hang with could get back to those two principles, perhaps those who like myself entirely agree with the article could all work together for peace and for prosperity, regardless of party affiliation.

Rich, Good Article, but you have one fact wrong “in 1973 and 1974, when stocks fell 48% and unemployment hit 11%”. The unemployement rate never hit 11% at any point during the entire decade of the 1970′s. During the 1973-75 recession the unemployment rate hit 9.0% for one month May 1975. That was the highest it every hit during that entire decade and was only there for 1 month. I am using the BLS official unemployment rate.

It should be pointed out that economies do not operate independently of their societies and our basic social expectations have changed.

In the post war years, America was the world’s example. A place superior to competing economic and governing systems. We had the rule of law, rightsband freedoms.

Today, we allow fascist racketeering gang stalking groups to openly and notoriously stalk, harass, poison and irradiate people without the slightest fear of arrest. Businesses are fleeing to safer countries. Do a web search on gang stalking if you need to.

This decline may unspoken because of fear, but it is having profound economic effects.

The reason the Republicans haven’t focused on “growth” is that they are focused on cutting Federal spending. If you believe cutting Federal spending won’t promote growth, perhaps you should be hammering on Mitch, Mitt, Newt and Huck to advocate policies that *will* promote growth.

“Fairness over growth gets you 2.0% to 2.5% annual growth, typical of the Western European social welfare states.”

If that is a bad thing, why are those places in so much better shape than the US at this point?

In general, they’ve retained more of their manufacturing, have more manageable debt levels and actually deliver social welfare benefits – which among other things, translates to a healthier and better educated population.

You make it sound like fairness and growth are incompatible, but places like Sweden tend to work because people think the society is basically fair, so they don’t mind contributing.

So what if their growth rates are low? People feel prosperous and a sense of inclusion in those societies (in general). China has a great growth rate, but the majority of people are out of the loop when it comes to benefitting, or to controlling their future and life is hell for millions of Chinese. Is that some kind of role model?

and BTW – it doesn’t make any difference how high the corporate tax rate is if it isn’t, in fact, collected. For some of the biggest and highly profitable companies (like GE) it’s effectively zero. Is that part of the “war on business”?

At best, the loopholes available to big corporations work to divert capital from its most productive uses to some other use that the government is trying to engineer. … or they work as methods the big corporations use to destroy smaller competitors who can’t get lines written into the tax code.

Your solution to the killing of the small competitors is to kill off the big companies too.

For one, a lower rate is an incentive to divert money from investment and hold large volumes of money on hand. If that money gets taxed instead, the incentive is to churn the money back into the business to avoid the tax, thereby improving growth.

The loopholes certainly need closed. Corporations should be taxed as they go, and money should not be allowed to be shuffled overseas to avoid taxes.

Our tax rate on business has little to do with their willingness to do business here, for the simple reason that they only pay taxes if they make a profit. So they go looking for profit. If you have the infrastructure, stability, and marketplace then they will come. Even at 50% real tax rate, the companies wouldn’t want to lose half the profit to be made in one of the world’s richest markets. They might not like it, but as long as there is a steady profit to be made, they’ll be here. Because that’s their job.

Four or five of the dozen or so EU economies are in the toilet, GDP v. taxes. Is it possible to make a comparison with something other than the EU? Our g’ment has been following the EU boilerplate far too long to see any other outcome. A couple in the former soviet block are almost booming because of their flat taxes … Duh?

My view is that there can be no long term growth with this tax code. I’ll go one step further and say that the “tax cuts will create growth” strategy is played out, and that we must;

1. Fix the entitlement problem (as permanently as possible), and

2. Completely gut the Tax Code, transitioning to 100% consumption taxes and no taxes on income.

There will never be a better window to argue for these things than the present.

I outlined the superstructure of the idea here.

http://chicagoboyz.net/archives/14340.html

and here

http://chicagoboyz.net/archives/14564.html

____

The current tax system is unsustainable. It can’t raise the money needed to fund even a “reformed” entitlement system, and it can’t be extended backwards to the millions taken off the tax rolls over the last decades.

It, along with Medicare, Medicaid, and Soc. Sec. have to go.

Individualize the welfare state, and tax consumption broadly, but at a low rate.

What is amazing about the 1946-2000 period of 3.5% average annual growth is that this growth occurred during periods of high taxation and low taxation, stock market booms and busts, and when private unions were strong and weak.

The weakening of the American economy from 2000 onward, therefore, must be associated with these factors:

I’m trying to figure out how the things you pointed out are supposed to cause increased growth.

1. Shrinking the wages and benefits of teachers seems guaranteed to ensure lower quality teachers. If you want quality you have to pay for it. Republicans certainly seem to get this concept when it comes to CEOs. Yet we would fix our education system by requiring people with Masters and even Doctorates to teach for the wages of a fry cook? 2. Employee unions remain shrinking. 3 & 4. Might I suggest that there is an inherent inconsistency in attacking regulators for not doing their jobs well enough while saying you don’t want them to do their jobs? 5. The Exxon-Mobil CEO admitted that oil is over $70 a barrel due to market manipulation and speculation. Further, it only costs $11 a barrel to produce oil. If oil is too expensive, it’s not a monetary policy issue. Those numbers come from yet another Forbes article by the way. 6. We need people picking fruit and doing all the other shitty jobs. If they want to come here to do the work, more power to them. Is stopping people from working supposed to increase growth? 7. With already scheduled increases in retirement age, the average retirement time has increased over a half century by a grand total of one month. I rather doubt the elderly not working for one month longer after many years of extra production is a significant cause of economic downturn. … Taking a look at the article’s original list: 1. The loose monetary policy you just condemned was the exact same policy which vigorously fought to bring stability to the dollar. We can either use monetary policy to attempt to stabilize the dollar, or we can allow the dollar to float as the market wills. I would be interested in your concept of how to do both. 2. 25% government spending would seem a considerable improvement over the 50% government spending of the European countries you are comparing us to. If that was a major factor, I’d expect us chopping it in half would be a significant effect already. 3. I am curious how we should lower the effective corporate tax rate below zero. That is the effective rate most corporations are currently receiving. Tax workers to increase corporate subsidies perhaps? I’m also fairly certain that our effective corporate tax rate is closely in line or below the international average, and in fact our companies are at a disadvantage because part of the that massive government spending in Europe is on things such as health care for workers which their companies don’t have to pay for. 4. Regulation? I’m not going to attack the concept itself, but this does seem somewhat incongruent with the rest of your choices. 5. Energy is very important. However, I rather doubt that every person and business in the country being forced to pay over $100 a barrel for oil that only costs $11 a barrel to produce is healthy for our economy. Supporting the oil and gas companies would seem contrary to our growth so long as that is the standard. 6. I’ve already addressed the comments on immigration, education, and unions. 7. Whether or not we agree with most of his policies, there is little argument that Obama has repeatedly pushed small business growth and programs. The more cynical might say as an intentional distraction from other programs, but that push still remains. 8. Patent reform. Two small words that I can in theory fully agree with, but I somehow suspect you and I would have two entirely different ideas about how to reform them. For instance, the tricks of Monsanto’s campaign to destroy small farmers, and the oil companies patenting biofuel technology to prevent others from using it. Two extremely anti-growth policies based on patent protection. … In short, everything you suggested seems aimed at reducing growth, not improving it.

I think you make the obvious case that growth is vital — and covers a lot of sins. But I do not think you make the case that America can grow at this rate consistently.

Forget Obama for the moment, the reason government spending soared under complete GOP rule was because it was the only option the Republicans had. To maintain our standard of living, government had to increase spending. Or… we reduce our standard of living or get the economy to grow. Clearly, all of us would prefer the later (getting the economy to grow) .

But it has not; not at the levels we would like (or have grown used to). And our past accumulation of debt, our demographics, and the rise of skilled labor and manufacturing output to equal America’s may mean we are in a long term structural transition period. Or it may mean things will never be as they once were.

Which is a bitch, I know, but it seems to me we should at least consider this as a legitimate possibility.